Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 56
THE DRUMMER'S EAR | RHYTHMIC REASONING
plans for additional expansion in the country. Given the current
valuation premium, further improvements in profitability and
earnings growth would be necessary before we could adopt a more
constructive outlook on the Japanese equity market.
In the Chinese market, policy support and geopolitical dynamics
will be key. Should the Ministry of Finance announceargeted
consumer stimulus in the 2026 budget (expected in November),
it could drive growth in lagging consumer sectors. While tensions
with the U.S. have eased since April, a longer-term resolution
remains elusive. Any sustained improvement in relations would
likely support sentiment and help close the valuation gap relative
to global peers.
Over the medium term, the outlook for international Equities
is encouraging, underpinned by structural themes such as
increased infrastructure spending, innovation in key sectors, and
a rebound in global economic growth. However, elevated market
expectations and ongoing uncertainty lead us to maintain a
neutral positioning for now.
KEY CONCLUSIONS –LATAM
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•
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Despite recent outperformance, LatAm valuations remain
attractive relative to historical levels and global peers.
Earnings growth is expected to moderate, but estimates
remain stable.
Environment buoyed by expectations of rate cuts by Banxico
drives Mexican equities to record highs.
After a banner earnings growth year in 2025, consensus
expectations point to more moderate growth in 2026 of 7.0%. Still
forecasts are encouraging given the significantly high base from
2025.
Fig 7: 2026 earnings growth in LatAm
is moderating from 2025 levels
48.3%
15.2%
CY25E
8.0%
7.0%
CY26E
Dec-24
Mar-25
In Mexico, despite domestic economic headwinds, the country’s
equity market (Mexbol) has been one of the top-performing
emerging markets in 2025. This strength is partly attributed
to the index's high level of foreign revenue exposure, which
has shielded it from local macroeconomic softness. That said,
earnings growth within the country has shown more dispersion,
with pressures on consumer discretionary and better performance
in defensive sectors such as consumer staples and financials.
This dynamic is reflected in the market reaction, where investors
have differentiated companies more strongly, rewarding those
with positive surprises and punishing those with weaker results.
Expectations of U.S. economic momentum thanks to Fed rate cuts
should further support Mexican earnings.
Further central bank easing and greater trade policy clarity could
act as catalysts for valuation re-rating. The renegotiation of the
USMCA and the implications for Mexico’s trading relationship with
its northern neighbors is likely to have implications for earnings
growth estimates as the focus shifts to 2026.
As we approach 2026, Latin America stands at an inflection point.
Historically, LatAm equities have outperformed during Fed easing
cycles—a dynamic that could play out again if current expectations
materialize. In addition, the region is well-positioned to benefit
from long-term themes such as the global energy transition, given
its significant exposure to commodities and materials. Energy and
Materials account for 26% of the MSCI Latam index; in 2024 40%
of global copper and 30% of lithium was mined in Latam, both of
which are components that are critical for the energy transition.
46.4%
9.8%
Brazil is entering its third consecutive year of aboveconsensus economic growth, primarily driven by resilient domestic
consumption. The country has taken a distinct path in monetary
policy, beginning its rate hiking cycle earlier than global peers in
2021 and then kicking off rate cuts in 2023. However, renewed
inflation pressures in 2024 led to additional tightening, with the
Selic rate now at 15%—its highest level since 2006—up from
10.00% in mid-2024. Investor sentiment has improved, driven by
expectations of rate cuts both from Brazil’s central bank and the
U.S. Federal Reserve by early 2026. Political dynamics will also
come into focus as the October 2026 elections approach. While
President Lula has not closed the door to seeking re-election,
optimism is building around a potentially more market-friendly
opposition candidate, which could boost investor confidence and
drive market re-rating.
Sep-25
Source: Bloomberg Finance L.P., Scotia Wealth Management
Looking ahead, macroeconomic conditions and political
developments will play a critical role in determining the region’s
trajectory.
However, political uncertainty remains a key headwind, with
several major elections scheduled across the region over the
next 12–18 months. Additionally, LatAm remains structurally
underweight in technology—a sector that continues to lead global
equity performance. Given these offsetting dynamics—attractive
valuations and cyclical tailwinds on one hand, and political and
structural risks on the other—we maintain a neutral weighting
toward the region.
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